TALES OF THE TAPE: Video Game Stks Seen As Good Play
By Maria V. Georgianis Dow Jones Newswires -- July 27, 1998
NEW YORK (Dow Jones)--The video game market is red hot, but many stocks in the group haven't caught on yet. It may be time for investors to get acquainted with some companies in this seasonally volatile sector as they gear up to ship games for the peak-profit fourth quarter. Many experts expect the industry to break all-time sales records in 1998.
U.S. retail sales of video game software and hardware are expected to exceed $6 billion in 1998, up from $5.1 billion in 1997, according to The NPD Group of Port Washington, N.Y., a market research firm.
"The current video game cycle is looking to be the longest and most profitable," said BT Alex. Brown Inc.'s Larry Marcus. And video game software sales for the current crop of game consoles won't peak until at least 2000, he added.
The best known name in the sector is Electronic Arts Inc. (ERTS), which holds a dominant share in video game sports titles. But some industry observers suggest better bargains might be found with the smaller companies in the field, such as Activision Inc.(ATVI), Midway Games Inc. (MWY) and Acclaim Entertainment Inc. (AKLM).
Most of the stocks in the video game software sector have 12-month price/earnings ratios that are below the average S&P 500 P/E of 23.2. Low P/E ratios are relatively rare in the technology sector, which is mostly known for its high valuations.
Video game software is currently made for two machines, Sony Corp.'s (SNE) Playstation and Nintendo Co.'s Nintendo 64. A third game hardware company, Sega Enterprises Ltd., is slated to release its Dreamcast game system in the U.S. next year. Sony and Nintendo aren't expected to release new systems until 2000.
In the first half of 1998, an estimated 31 million units of video game software were sold in the U.S., up 82% from the same period last year, according to The NPD Group. Software revenue in 1998's first half was $1.2 billion, compared with $770 million in the year-ago period.
U.S. video game software revenue for the current game systems is expected to hit $3.15 billion this year, up from $2.24 billion last year, estimated analyst Stephen Fleming, of BancAmerica Robertson Stephens & Co.
"We think 1999 is likelier to be stronger than 1998," said Electronic Arts Chief Executive Larry Probst. "Software tends to peak a year after the hardware," Probst said. Console sales are likely to reach their high point in 1999 when their prices are cut to $99, Probst said. "Calendar year 2000 is the peak software year," he said.
But some believe software sales will crest earlier.
"Nineteen ninety-nine will see a bit of flattening of sales because people are waiting in the wings for the next-generation platforms," said Walter Miao, principal of market research firm Access Media International in New York.
And many analysts continue to urge a fair amount of caution about the sector despite the promising title line-up from the smaller companies. Some industry experts note companies have missed product release dates in the past, which dramatically hurt sales in a given period.
During the transition to new game systems, video game software companies' revenue growth slows until the demand for games designed for the new consoles is able to offset the decline in game sales for the older game systems.
The last game console transition happened in 1995 with the move from 16-bit systems to 32-bit systems. It was very rough on the industry and took a toll on profits.
But game companies "will survive this one a lot better," said James Lin, an analyst at Wedbush Morgan Securities Inc. For starters, the last transition involved a change from the higher cost cartridge-based software to far less expensive CD-based software.
Sony's new game system slated for 2000 is expected to use a similar optical-media format as current machines. Sega will also use an optical-media format, while Nintendo's choice of format is an unknown.
Electronic Arts is the current giant in the industry at twice the size of its nearest competitor, GT Interactive Inc. (GTIS). Electronic Arts is expected to become the first video game company to cross the $1 billion revenue mark during its current fiscal year ending in March.
"Electronic Arts is the only one you can talk about with any level of predictability," said John Taylor, an analyst at Arcadia Investment Corp. "You're hard-pressed to say that with other companies because their revenue can swing so much depending on if a title slips," Taylor said.
Unlike many others in the video game sector, Electronic Arts has a relatively high P/E ratio of around 30. The P/E discrepancy between Electronic Arts and the others can be explained by the fact that "most of the other companies in the past 12 months have seriously disappointed in some quarter" in part because of delays in releasing new products, Taylor said. Analysts expect the company's earnings to increase 35% in fiscal 1999.
The company has a dominant market share in video game sports titles with its EA Sports line including the John Madden Football, FIFA Soccer and NASCAR racing series. It is also adding franchises - this year with Tiger Woods Golf 99.
But considering the potential profit growth rate for some video game software companies over the next 12 months, there are several bargains for investors to be found, analysts said.
Earnings at Midway Games, which has a P/E of 11, are expected to grow 21% in its fiscal year 1999 ending next June, according to First Call Corp.
Among Midway Games' most anticipated titles are arcade-hit NFL Blitz, which has the potential of selling more than one million units per console, and Mortal Kombat 4.
Acclaim's fiscal 1999 earnings, ending next August, are anticipated to grow 44%. The stock has a P/E of 16. Acclaim is expected to make a splash with a sequel to Turok: Dinosaur Hunter, which was the best-selling title for the Nintendo 64 and has sold at least 2 million units since its release last year.
Perhaps the most dramatic earnings growth is anticipated from Activision. A consensus of analysts expects earnings to expand 100% in Activision's fiscal year 1999 ending next March. The stock is trading with a P/E of 21. Among its expected video game best-sellers is Asteroids, a remake of its 17-year-old Atari classic.
|
